Kirby - Q4 2013
January 30, 2014
Transcript
Operator (participant)
Welcome to the Kirby Corporation 2013 fourth quarter year-end conference call. My name is Trish, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I would now like to turn the call over to Steve Holcomb. Mr. Holcomb, you may begin.
Steve Holcomb (Head of Investor Relations)
Thank you for joining us this morning. With me today are Joe Pyne, Kirby's Chairman and Chief Executive Officer, David Grzebinski, Kirby's President, Chief Operating Officer, and Chief Financial Officer, Greg Binion, President of our Marine Transportation Group, and Andy Smith, currently our Executive Vice President of Finance. During this conference call, we may refer to certain non-GAAP or adjusted financial measures. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures is available on our website at kirbycorp.com in the Investor Relations section under Non-GAAP Financial Data. Statements contained in this conference call with respect to the future are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking statements involve risk and uncertainties. Our actual results could differ materially from those anticipated as a result of various factors.
A list of these risk factors can be found in Kirby's Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission. I will now turn the call over to Joe.
Joe Pyne (Chairman and CEO)
Thank you, Steve. Yesterday afternoon, we announced record fourth-quarter earnings of $1.13 per share, near the upper end of our $1.05-$1.15 per share guidance range. That compares to $1.03 per share reported for the 2012 fourth quarter, a quarter which included a $0.09 per share credit, reducing the contingent earn-out liability associated with our acquisition of United Holdings in April 2011. For the year, we again achieved record earnings of $4.44 per share, compared with $3 and, excuse me, 73 cents per share for the 2012 year.
Our 2013 results included a $0.20 per share, and the 2012 results, a $0.05 per share credit to the earn-out liability associated with the acquisition of United. The United contingent liability earn-out was eliminated as of September 30, 2013. Our guidance range for last year was $4.37-$4.47 per share. During the fourth quarter, our marine transportation, inland and coastal tank barge fleets continued to experience healthy levels of demand across all markets, high equipment utilization levels, and favorable pricing trends. We continue to benefit from strong U.S. petrochemical production levels, stable refinery production levels, the export of refined products and fuel oils, and the movement of crude oil and natural gas condensate from the U.S. shale formations.
We did experience higher than anticipated delay days in our inland operations during the quarter, primarily the result of high winds and fog along the Gulf Coast, as well as some difficult weather in our coastal operations. Our land-based diesel engine service market remained challenged. We think this will improve in 2014. Our marine, diesel, and power generation markets were stable, with results consistent to the prior quarters in 2013. As we announced in early January, David Grzebinski was named President and Chief Operating Officer, the first step in the succession plan that we announced in April of last year, with the goal of transitioning my Chief Executive Officer position to David this year. I want to welcome Andy Smith to our management team. Andy started in early January, and his current title is Executive Vice President of Finance.
Andy will replace David as Kirby's Chief Financial Officer in late February after the filing of Kirby's 10-K for 2013. I intend to step down as Kirby's CEO at our annual shareholders meeting in late April. I will remain as Kirby's Executive Chairman and look forward to working with David and the Kirby management team. I'll now turn the call over to David, who will discuss in more detail our marine transportation and diesel engine service markets and give you a financial update. Following his remarks, I'll come back with some comments about our first quarter and year-end guidance and outlook.
David Grzebinski (President, COO, and CFO)
All right. Thank you, Joe, and good morning to everyone. Let me start with our inland business. During the fourth quarter, our inland marine transportation sector continued its overall strong performance with equipment utilization in the 90%-95% range and favorable term and spot contract pricing. We did, as Joe mentioned, experience high delay days during the quarter, which was primarily the result of seasonal frontal systems along the Gulf Coast and accompanied with some high winds and fog. Delay days totaled 1,985 days, which was 34% higher than the 1,479 delay days reported in the fourth quarter of last year, and 54% higher than the 1,289 delay days reported in 2013 third quarter.
For the fourth quarter, inland transportation revenues from our long-term contracts, contracts over one year or longer, were 75% of revenue, with the remaining 25% spot. Of the term contracts, 57% were from time charters, and the remaining 43% from contracts of affreightment. In the inland marine transportation group, term contracts renewed during the fourth quarter, at a rate of a mid-single digit kind of increases compared with the 2012 fourth quarter, and which was consistent to prior quarters during 2013. Spot contract rates were up, and they remain above term contract rates, which is also consistent with the 2013 prior quarters. Moving to inland tank barge construction.
During 2013, we took delivery of 70 new tank barges, totaling approximately 1.4 million barrels of capacity, but we also retired 46 tank barges and returned 4 leased tank barges, removing approximately 800,000 barrels of capacity. For 2013, netting the two, we ended up adding 20 tank barges to our fleet and increasing our inland capacity by approximately 600,000 barrels. As of December 31, we operated 861 tank barges with a capacity of 17.3 million barrels. Also during 2013, we took delivery of three 2,000-horsepower inland towboats. At the present time, our 2014 inland construction program will consist of 37 inland tank barges with a total capacity of approximately 400,000 barrels.
Payments on new inland tank barges delivered during 2014 will be approximately $45 million. Currently, we expect to finish 2014 with approximately 17.5 million barrels of capacity, or about 200,000 barrels above our current capacity level. On the coastal side, the coastal marine transportation sector continued to perform well with equipment utilization about 90% during the fourth quarter, which is consistent with the most of 2013 and well above where we were in 2012. All of the coastal markets remain strong, driven in part by increased demand for crude and condensate moves. We also continued our progress in expanding our coastal business to inland marine customers. During the fourth quarter, approximately 75% of coastal revenues were under term contracts, which compares with about 70% a year ago.
The increase came from new contracts signed during 2013. With respect to coastal marine transportation pricing, term contracts that renewed during the fourth quarter increased in the high single digits, and in some cases, higher than that, when compared with the 2012 fourth quarter. Spot contract rates continued to improve during the fourth quarter and remained above term contract rates. Earlier this month, we announced the signing of an agreement to construct an articulated 185,000-barrel coastal tank barge with a 10,000-horsepower tug at a cost of approximately $75 million-$80 million. We anticipate this unit will be delivered in mid- to late-2015, and the unit will be chartered to a major customer for a 4-year period with 1-year extension option.
This coastal barge has the capability of moving crude oil or petrochemicals. With utilization in the 90% level range, for the coastal fleet and increased demand for the movement of crude oil and natural gas condensate, we believe new capacity is needed to meet demand and also to replace older units, which will be removed from service in the coming years. In total, the marine transportation segment revenues grew 14%, and operating income grew 20% compared with the 2012 fourth quarter. The inland sector contributed approximately 70% of the marine transportation segment revenue, with the coastal sector the remaining 30%.
Our inland marine sector earned a fourth quarter operating margin in the upper 20% range, while the coastal sector operating margin for the fourth quarter was in the mid-teens, which compares to low double digits for the 2012 fourth quarter. Overall, the marine transportation segment's fourth quarter operating margin was 24.8%, which compares from a year ago to 23.6%. As Joe noted, our 2013 full year earnings of $4.44 per share included a $0.20 per share credit from the adjustments to the contingent earn-out liability associated with United. The contingent earn-out liability was eliminated as of September thirtieth of 2013, and we do not expect any more adjustments to the earn-out as the earn-out period is over.
As you know, this 20 cent per share addition to our 2013 earnings will not be repeated in 2014. Moving on to our diesel engine services business. Revenues for 2013 fourth quarter increased 2%, but operating income was down 64% compared with the fourth quarter of 2012. However, in 2012, we had $8.2 million credit from the earn-out. Without the effect of the earn-out, the operating income would have been down about 3.6%. The segment's operating margin was 3.5%, which compares to 10% from the year ago quarter, which, if you adjust out the earn-out that I talked about, $8.2 million, the year-ago quarter would have been about a 3.7% margin.
The decline in operating income in the diesel engine business was primarily based due to our land-based operation. Our land-based operations contribute about 60% of the diesel engine services segment revenues, and they did report a small operating loss. The marine and power generation operations contributed 40% of the revenues and had an operating margin in the 10% range. On the corporate side of things, we continue to pay down debt during the fourth quarter and the full year, thanks to continuing strong cash flow. Total debt as of December 31 was $749 million, a $386 million reduction from our total debt of $1.14 billion at the end of last year. Year-end 2012 debt reflected the debt balance from the fourth quarter acquisitions of Allied and Penn.
Our debt to total cap ratio fell to 27% as of year-end 2013, and that compares to 39.9% a year ago. As of December 31, we had $41 million outstanding under our revolving credit agreement, and as of this morning, we have $34 million outstanding under the revolver. Our term loan balance at December 31 was $208 million, which compares to $468 million from December 31 of 2012. I'll now turn the call back to Joe.
Joe Pyne (Chairman and CEO)
Okay. Thank you. Thank you, David. Our 2014 first quarter guidance is $1.05-$1.15 per share. This compares with $1 per share earned in last year's first quarter. A quarter that also included $0.05 per share credit from United's contingent earn-out liability. For the 2014 year, our guidance range is $4.75-$4.95 per share, compared to $4.44 in 2013. Remember that, 2013 earnings included an accumulative $0.20 per share credit to the same earn-out liability.
Our first quarter guidance assumes a modest improvement over 2013 fourth quarter pricing in our inland marine transportation markets, markets that continue to operate at close to full utilization levels. It also assumes a continued strong coastal market with higher term and contract pricing. Our first quarter guidance includes some negative impact from unfavorable winter weather conditions, which we are experiencing certainly this month. On the inland side, we've experienced some extreme cold weather conditions on the upper river system, with below freezing temperatures, heavy ice on the Illinois, Upper Mississippi, and Upper Ohio Rivers, and with wind chill factors in the low 40 degrees. Excuse me, as low as 40 degrees below zero. We continue to operate on these rivers despite the heavy ice conditions, but with additional horsepower or reduced tow sizes. The forecast for the area from St.
Louis to Chicago is to remain below freezing for at least the next 10 days. Now, predicting weather is something that we're not good at. If weather continues to remain as miserable as it currently is, we may not have enough weather delays in our forecast. However, we are hopeful that we'll see the usual weather improvement we normally see beginning in late February and extending into March. For our diesel engine service group, we do feel that we're at the bottom of the cycle for our land-based market and should begin to see improvement sometime in 2014. Our first quarter guidance assumes our diesel engine service, marine and power generation markets will remain stable and similar to where they were in 2013, and the land-based diesel engine service will see little, if any, improvement in the first quarter.
The primary difference in our 2014 first quarter, $1.05 low end and $1.15 high end guidance, is the severity of the weather conditions in both our offshore and inland markets and the level of improvement, if any, in our land-based diesel engine market. Turning to the year-end guidance, the low end of our 2014 year guidance, of $4.75 per share assume-- excuse me, $4.75 per share, assumes our inland marine transportation equipment utilization will remain in the 90%-95% range, and the coastal equipment utilization will average over 90%, consistent with 2013, and some modest improvements in both inland and coastal pricing.
It assumes our marine and power generation markets will remain consistent with 2013, and our land-based markets will not see an improvement until late this year. Primary drivers in the high-end guidance of $4.45 per share, our inland rate increase is consistent with last year, higher coastal equipment utilization and higher pricing, and consistent improvements in the land-based diesel engine service market through this year. In summary, 2013 was a record-setting revenue and earnings year for Kirby, with 2014 forecasted for another year of record operating results. Our balance sheet is strong, and as David noted, our debt-to-total cap ratio is 27%.
Our excellent cash flow allows us to continue, continue to build new tank barges, primarily as replacement barges for older equipment, construct the new 185,000-barrel ATB unit, and continue to pay down debt. And we are very well positioned for any potential acquisitions that also may present themselves over the course of this year. Operator, that, that concludes our prepared remarks. We're now ready to take questions.
Operator (participant)
Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. We ask that you please limit yourself to one question and one follow-up question. If you are using a speakerphone, you may need to pick the handset up first before pressing the numbers. Once again, if you have a question, please press star, then one on your touchtone phone. Our first question comes from Michael Webber, from Wells Fargo. Please go ahead.
Michael Webber (Managing Director of Investments Webber Wealth Management Group)
Hey, good morning, guys, and welcome, Andy.
Joe Pyne (Chairman and CEO)
Thank you.
Michael Webber (Managing Director of Investments Webber Wealth Management Group)
Hey, wanted to focus on the coastal market, and you placed an order for your first ATB, or I guess, your latest ATB, a bit earlier. Just curious, maybe, how much of an opportunity is there within that coastal market to place additional orders, and expand and keep that growth rate kind of in place? I know we've talked about that for the last couple quarters, but maybe since you pulled the trigger on one, you know, I guess, how much of an opportunity set is there, and are you any closer to adding to that?
David Grzebinski (President, COO, and CFO)
Yeah, Michael, this is David. Yeah, there's still quite a bit of opportunity. You know, there's not really been much new coastalwise capacity added in the 200,000-barrel and less market. We see increasing demand for moves. You know, crude and condensate moves are part of that, a big part of that, but we've also seen other volumes pick up as well. We are, of course, in discussion with other customers about their needs, and, you know, it's quite possible we could build additional units beyond just this one 185.
Michael Webber (Managing Director of Investments Webber Wealth Management Group)
That's it. That's helpful. As my follow-up, kind of along those lines, you know, I guess earlier this year, or very late 2014, or 2013 rather, we saw Kinder Morgan enter the coastal space via APT, and their MRs. When you think about that new entrant, do you look at them as a potential competitor around the coastal space? Granted, they're operating larger assets. And you think we'll see other large land-based players start to enter the Jones Act space?
Joe Pyne (Chairman and CEO)
Yeah, you know, we of course operate smaller units, so we're not gonna directly compete with them.
Michael Webber (Managing Director of Investments Webber Wealth Management Group)
Right.
Joe Pyne (Chairman and CEO)
I see it frankly as positive because the affirmation by a pretty sophisticated investor or somebody that understands the supply chain of its customer base that the marine vessel is an important component of the supply chain. So, you know, we welcome them. In the space, we think that they're a very good operator, and glad to have them there. Yeah, but to be clear, Mike, we don't compete with the MR tankers.
Michael Webber (Managing Director of Investments Webber Wealth Management Group)
Right.
Joe Pyne (Chairman and CEO)
Most of our moves are regional in nature. We get into some smaller docks that these big tankers can't get into and whatnot.
Michael Webber (Managing Director of Investments Webber Wealth Management Group)
Sure, sure. The question is more around them moving into the space and doing more, and I think Joe kind of handled that. So, thanks, David, and thanks, Joe, and thanks for the time.
Joe Pyne (Chairman and CEO)
Thank you, Mike.
Operator (participant)
Our next question comes from Greg Lewis, from Credit Suisse. Please go ahead.
Greg Lewis (Oil Service Analyst)
Yes, thank you, and good, good morning, guys.
Joe Pyne (Chairman and CEO)
Morning, Greg.
Greg Lewis (Oil Service Analyst)
David, you mentioned a little bit on the guidance about some of the weather delays, you know, wind, fog. As that pertains to the coastal market, just given that the weather dynamics of the coastal business are a little bit more harsher than what we see from time to time in inland. How should we be thinking about that? Because, I mean, clearly it seems like as we think about the first quarter, you know, that is going to be, you know, could provide some delta to your earnings performance. And I guess in the fourth quarter, it impacted it. Where should we be thinking about that having the most impact? Is that more of a West Coast impact?
Is that in the Gulf of Mexico, or is it on the U.S. East Coast, or is it a combination of all three?
David Grzebinski (President, COO, and CFO)
Yeah, it's probably closer to a combination. Certainly, on the West Coast, up in Alaska, the season can extend in the fourth quarter, or it can be shortened, depending on how quickly the weather moves in. And likewise, as you come out of the winter months, how quickly you can go back to work in the Alaska market. On the East Coast, you know, we've had ice on the Hudson River, which I'm sure you're familiar with. And that does slow us down a little bit. And in some cases, you got to be careful how you move through ice. It's mitigated, though, by time charters.
Greg Lewis (Oil Service Analyst)
Right.
David Grzebinski (President, COO, and CFO)
Yep.
Greg Lewis (Oil Service Analyst)
Yeah. And then my just follow-up question is going to be more on inland. I mean, you guys are in a great spot here. I mean, the market's been, you know, going in your favor for the last few years. As we think about the market and how customers are thinking about the market right now as we start in 2014, have customers changed their mindset at all in terms of thinking, hey, the outlook for this sector looks pretty tight, the supply-demand looks pretty tight. Have you seen customers maybe wanting or trying to, you know, have conversations with you and others about potentially, you know, building out their contract duration and extending charters?
Are you seeing, are you seeing any of that, or, or is it more just status quo in that market?
Joe Pyne (Chairman and CEO)
Yeah, I know more than usual. I think the customers are comfortable with the length of term with their operators. So we're not seeing a push for that much length. It depends on the customer, of course, but I would say that it's about where it was in 2013.
Greg Lewis (Oil Service Analyst)
Okay, guys. Hey, thank you very much for the time.
Operator (participant)
Our next question comes from John Chappell from Evercore. Please go ahead.
John Chappell (Managing Director)
Thank you. Good morning, guys.
Joe Pyne (Chairman and CEO)
Morning.
John Chappell (Managing Director)
Joe and David, my first question is on the land-based diesel engine services. Obviously, a little bit of potentially light at the end of the tunnel here. I'm just wondering, when you think about the potential for a modest improvement in that business, what's the balance between kind of the OEM stuff, which had been very successful in years past, and as the gas price has moved up pretty significantly over the last just three months, versus the remanufacturing stuff that it seems that you've been kind of shifting your focus to since you've taken on United?
Joe Pyne (Chairman and CEO)
Yeah. Well, John, as you know, we think that the real sweet spot at United is going to be the reman business. Having said that, if we have the capacity and we get orders for new equipment, of course, we're going to build it. We'd like to have a combination of both, but as you look at the kind of the ratio of new versus reman, we would like to weight it towards reman. We think the opportunity for margin improvements are better there. The service side of the business, I think it's more predictable. We think it's steadier, but that doesn't mean that we're not going to pursue, you know, building new frac spreads and related components.
John Chappell (Managing Director)
Got it. And then, for my follow-on, a theme that we talk about frequently is just the uses of cash. You obviously have, still a pretty decent-sized CapEx program and then the ATB, built for your customer. But when you think about the amount of cash you're generating, you've already paid down a lot of debt. I mean, you, you could potentially be, not debt-free, but close to debt-free, with the exception of your senior notes. How do you weigh kind of the opportunities between new builds, building the fleet, acquisition opportunities, and maybe just an update there, and then also any further thought to the implementation of a modest dividend, which may not have to be mutually exclusive with expansion going forward?
David Grzebinski (President, COO, and CFO)
... Yeah, John, I think it's gonna be fairly consistent with our prior answers here. We're gonna maintain our fleet and look at, you know, maybe adding some additional coastal equipment as you see us do with this 185. You know, they're quite expensive, $75 million-$80 million. If we add some more of that, it could use some cash. Clearly, we'll maintain our fleet and keep that in top-notch space. But, excuse me, in top-notch condition. You know, we'll be looking for acquisitions as we always do. You know, they're hard to predict. That would be our first choice for use of cash, consolidating acquisitions. As you know, there's still 40, 40-plus inland players out there and a dozen or so coastwise players.
It's hard to predict acquisitions, but that would be our preferred use of cash. Absent being able to get one done, would probably delever some more, but clearly, we're looking at if we continue this way, we'll have to return some cash to the shareholders, and we'll look for either share repurchase opportunities or a dividend. But you know, again, we hope to be able to use it to add some equipment coastwise, as well as do some acquisitions.
Joe Pyne (Chairman and CEO)
Yeah, and just to follow up on David's comment, you know, I think we believe that we can continue to use our free cash flow, reinvesting in the business. You know, if we conclude that that's not possible, then we'll consider other things, but we think the prospects of continued investment still are strong.
John Chappell (Managing Director)
Understood. Thanks, Joe and David.
Joe Pyne (Chairman and CEO)
Thanks, John.
Operator (participant)
Our next question comes from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead.
Ken Hoexter (Managing Director and Equity Research Analyst)
Great. Good morning, Joe. Congrats on your next steps, and thanks for the legacy of a solid management team you leave behind. But maybe, David, you can talk a bit about, you know, now that to follow on John's question on CapEx there, your thoughts on the market overall in terms of pace of growth that you see in, on the market, on the... Let's go with the inland barge side first.
David Grzebinski (President, COO, and CFO)
Yeah, no, there, there's some building going on, surely. It's probably at around the same level as it was last year. Retirements are around the same level, well, we anticipate, we don't know for sure. But, you know, right now, all that capacity is being absorbed. Every day, you know, we're searching for barges to satisfy customers' needs. So things are pretty good now. Can we overbuild? Will we overbuild? You know, we will, as an industry, we always do. But it seems like with the volumes that we're seeing now, it's gonna continue for a while. And then we've got this chemical renaissance that's happening with the chemical plant expansions and indeed, even greenfield plants. They're gonna take years to play out.
As you know, it takes a while to permit and build these big ethylene plants and large chemical complexes. So we'll see where that goes. But so far, so good. But again, you know, I'm not trying to sugarcoat it. As an industry, we will overbuild. Just doesn't seem like we're there anytime in the near term. On the coastwise business, it's I think we've got a pretty long runway. There it takes, as you know, 18 months to two years to add capacity. Not a lot of capacity being built right now.
and then when you look at the fleet, at least the fleet of 200,000 barrels and less, you know, there's 270 or so in that fleet, a good 40 of them are 25 years or older. So I think, I think we've got a longer runway on, on coastwise, and it looks pretty good.
Joe Pyne (Chairman and CEO)
Let me just add some color to overbuilding. I think what David is referring to is the inevitability of capital-intensive businesses not standing good times. I think with respect to this particular business cycle, for providing the, you know, the volumes are consistent, I think the industry is gonna recognize when it can't absorb the equipment. I'm reasonably optimistic that we'll pare down the building. You know, even as you look at shipyard slots and availability for 2014, there are slots available. I think the industry is mindful that there's only so much capacity that can be absorbed.
So, you know, barring a volume event, I'm not particularly worried about it.
Ken Hoexter (Managing Director and Equity Research Analyst)
And then, I appreciate that insight. Thank you. Just the new barge, is this solely for crude? Is it for petroleum? I'm sorry, chemical. What is the goal with the new adds?
David Grzebinski (President, COO, and CFO)
Uh, the-
Ken Hoexter (Managing Director and Equity Research Analyst)
I'm talking about the ATB, I guess.
Joe Pyne (Chairman and CEO)
Is this our add, meaning the-
David Grzebinski (President, COO, and CFO)
The ATB.
Ken Hoexter (Managing Director and Equity Research Analyst)
Yeah, I'm sorry, the ATB. Yeah, yeah.
Joe Pyne (Chairman and CEO)
Yeah, go.
David Grzebinski (President, COO, and CFO)
Yeah, no, that, she's capable—she'll be capable of moving crude or, or petrochemicals. But, you know, I think her, the initial thought is probably crude, but, you know, the customer can change-
Joe Pyne (Chairman and CEO)
... change direction, because the barge is very capable. And Ken, just coming back to your original question, if I think what you were looking for, you know, what you think our view is of our growth rates going forward?
Ken Hoexter (Managing Director and Equity Research Analyst)
No, you know, I think Dave hit on it initially, just on the thoughts on the runway for the whole market, right? So just to understand, and he got to the point right there of the overbuild, or you threw in there the not overbuild at some point, but it really was kind of the industry growth and relative to what the industry is adding in terms of capacity.
Joe Pyne (Chairman and CEO)
Okay. Got you.
Ken Hoexter (Managing Director and Equity Research Analyst)
So my last one is just back to the thoughts on rates. When you think about the coastal marine, if I look at the inland barging, once that hit that utilization over that 90%-95% range, it seemed like you had maybe two years of very, very robust rate growth, and then kind of a long runway of mid-teens growth. Any reason why we shouldn't think about that in terms of rates as you get back to that reinvestibility level on the coastal business?
Joe Pyne (Chairman and CEO)
meaning that, well, you know, rates should-
Ken Hoexter (Managing Director and Equity Research Analyst)
Meaning that we see some super-sized rate increases-
Joe Pyne (Chairman and CEO)
Yeah
Ken Hoexter (Managing Director and Equity Research Analyst)
-to get you to the point of reinvestibility on the coastal side, and then-
Joe Pyne (Chairman and CEO)
Right
Ken Hoexter (Managing Director and Equity Research Analyst)
get proper returns, I guess, for the investments.
Joe Pyne (Chairman and CEO)
Well, I think initially, you're gonna see a two-tier market. You're gonna see higher rates for newer equipment than you get for existing equipment. And then that gap's gonna narrow. How quickly it narrows, that's uncertain. But to get reinvestment in the business, particularly with respect to replacement investment, you need to get rates up that justifies you spending the money to replace the equipment. So it'll happen. It happened on the inland side of the business.
You may not get, you know, all rates up to replacement. It may be a blended rate, but rates should continue to rise until you approach the kinds of returns that you need to invest the capital to build the vessels.
Ken Hoexter (Managing Director and Equity Research Analyst)
Wonderful. Truly appreciate the time and insight. Thanks, guys.
Operator (participant)
Our next question comes from Jack Atkins from Stephens. Please go ahead.
Jack Atkins (Research Analyst)
Good morning, guys. Thanks, for taking my questions.
Joe Pyne (Chairman and CEO)
Good morning.
Jack Atkins (Research Analyst)
So I guess just to go back to Ken's, I guess, first question, you know, about the expansion that we're seeing and we're hearing about on the domestic chemical side. You know, you guys list quite a number of projects in the back of your investor deck, and I guess when you all are sort of modeling the industry out internally and looking out over the next, you know, two, three, five years, what sort of growth rate do you think that the domestic chemical barging industry will be seeing here over the next several years? Because it seems like there's a fairly long runway of growth ahead of us.
Joe Pyne (Chairman and CEO)
Yeah, it's Jack, it's really hard to predict in terms of percent. You know, I wish we were smart enough to pencil it out and say it's gonna be 4.5% annual growth, but or some number like that. It is really hard to say because as you look at these projects, it just depends on the project. Certain projects may have quite a lot more barge moves than others. For example, a methanol project could have a lot or an ammonia project, for example. Whereas, you know, if it's just a light hydrocracker that, you know, it could just ethylene that's converted into polyethylene, could be not a lot, but if it's a Flexicracker, it may have some co-products and whatnot.
So it's complicated. We really don't know. But given, you know, just thinking about it holistically, if all that chemical capacity gets built, a good portion, or not a good portion, but a significant meaningful amount will end up on the water.
Yeah, it's gonna be positive, for sure. And some of it depends on where it's gonna go. Remember, you know, the longer, the longer the trip, the more barges it takes. I don't, I don't think, I don't think there's a computer model big enough to, to figure all that out, but it, it's clearly positive.
Jack Atkins (Research Analyst)
That's, that's understandable. And then for my follow-up on the diesel engine side, you know, I guess we've been sort of anticipating a recovery in that market now for the better part of a year, and certainly, I think all indications are we may see that in the second half of 2014. But, you know, at what point would you all begin to look at the business and maybe say, "You know, we're carrying some extra costs here, and, you know, if we don't see that recovery take place, maybe it's time to sort of, you know, pare back and then get that business profitable just based on the current level of demand?
Joe Pyne (Chairman and CEO)
Yeah, great question. This year.
Jack Atkins (Research Analyst)
You know, Joe, is there a way to, you know, quantify the extra costs that you think you're carrying, though?
Joe Pyne (Chairman and CEO)
Oh, yeah, I don't... I'm not prepared to do that right now. We, yeah, we've certainly looked at that, but we believe that business is gonna recover. And, you know, you could take cost out of it now, but it would look pretty foolish if the business is doing well towards the end of the year and you're not prepared to accommodate it. We think that there's not only a lot of demand that needs to happen, but there's also some additional equipment that's gonna be built, and we wanna position ourselves to do that. We've already incurred most of the pain.
You know, truthfully, we've said this before, that we predicted a slowdown in 2013. We also predicted a ramp up in 2011 and 2012. What we got wrong was the magnitude of both of them. And when you know, when you even them out and you bring the earn-out back, it actually has been an okay investment for us.
We think that, you know, 2013, excuse me, 2014, is gonna be the year where, you know, we get back on track, and we're, we're very well positioned, we think, to capture, you know, that reman business, which, long term, should be steadier, better margins, a nice, kind of service business that, has similar characteristics to what we do on the marine side. Anything to add to that? Yeah. Okay, guys. Thanks for the time.
Operator (participant)
Our next question comes from Kevin Sterling from BB&T Capital Markets. Please go ahead.
Kevin Sterling (Managing Director and Equity Research Analyst)
Good morning, gentlemen. It's actually William Horner on for Kevin. Sticking with diesel for a second, and the signs that the improvement you all saw late in the quarter, I was hoping you could provide more color on the reason behind this. Do you think it was indicative of maybe customers firming up their 2014 capital plans, maybe, you know, the spike in natural gas prices we saw? Or do you think it was just more general green shoots of the cycle starting to turn?
David Grzebinski (President, COO, and CFO)
Yeah, it's probably more... Well, we're hopeful that it's green shoots. There could be some, you know, year-end capital spending true up that you occasionally see. But it feels pretty positive, William. I'd call it green shoots. At least that's our hope, and it certainly feels that way. When you talk to the customers, they're a lot more constructive this year. I think they're being prudent and cautious. They don't wanna overcommit, but they're certainly a lot more constructive and we are quoting a lot more potential activity, both on reman and new equipment.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay, great, David. That's, that's helpful. Thank you. And, just going back to the marine business during the quarter, is there any way to-- we can quantify the, the weather impact, either from a top line or earnings perspective?
David Grzebinski (President, COO, and CFO)
Yeah, that's, yeah, it's really difficult.
Kevin Sterling (Managing Director and Equity Research Analyst)
Tough question.
David Grzebinski (President, COO, and CFO)
Yeah, it's just so difficult because there's so many different moving parts. William, it's just too difficult to quantify. Probably be easier at the end of this quarter, as you-
Kevin Sterling (Managing Director and Equity Research Analyst)
Fair enough. Okay, that's fair enough. One more, then I'll turn it over. Have you seen or do you anticipate any impact to the inland crude space now that the southern leg of the Keystone Pipeline has opened up?
Joe Pyne (Chairman and CEO)
We're certainly not seeing it. There's still plenty of demand. Remember that what's driving the use of barges to transport crude oil in the inland space is Eagle Ford crude oil condensate to kind of the Houston, Port Arthur area, and crude oil and condensate stranded in the Midwest that needs to come south to be refined and doesn't have pipeline availability, and then some Canadian crude still. But we're really not seeing that leg have an effect on the routes that we service.
Kevin Sterling (Managing Director and Equity Research Analyst)
Okay, Joe, that's helpful. Appreciate your time.
Operator (participant)
Our next question comes from Chaz Jones from Wunderlich. Please go ahead.
Chaz Jones (Senior VP)
Yeah. Hey, good morning, guys. You know, my first question was just thinking about the rail tank car standards that have been talked about a lot recently with accidents and, you know, if the government moves to raise the standards for rail tank cars, if that would have any implications, whether positive or negative for Kirby's marine business. Obviously, understanding that your equipment's already double hulled.
Joe Pyne (Chairman and CEO)
Well, we're not only double hulled, we are inspected, taken out of the water, walked around, gauged, and we welcome that the same criteria is imposed on other modes of transportation. Yeah, it's gonna raise your costs, and in that, we're kind of already there. It may improve the cost advantage that barges have. Barging already enjoys a cost advantage to rail, so it's just gonna expand it, if it does anything.
Chaz Jones (Senior VP)
Got it. And then, maybe just looking for a little bit of clarification on the guidance, particularly the land-based side of the business. Obviously, you pointed to perhaps, you know, not a lot of improvement in Q1, but, you know, maybe some progress as the year goes on. You know, are we kind of thinking about returning to sort of low, mid-single digits type operating margins there, or are we thinking about that wrong?
Joe Pyne (Chairman and CEO)
Yeah, I think, as we think particularly about United in the diesel engine land-based business, you know, we've kind of built into our guidance a little bit of a recovery in the back half of the year. You know, I don't have the margin off the top of my head, but it's, yeah, probably mid-single digits, moving up from where it is now, is what we're anticipating as we move through the year.
Chaz Jones (Senior VP)
Okay, great. Thanks, guys. Thanks for taking my questions.
Operator (participant)
Our next question comes from John Barnes from RBC Capital Markets.
John Barnes (Managing Director and Senior Research Analyst)
Hey, good morning, guys. Thanks for your time. You were, Joe, in your comments about pipeline capacity and some of the crude coming out of the Midwest that maybe doesn't have pipeline availability. I guess right now, you've got a couple of pipelines that are actually down for maintenance. I think the Ozark being the big one. Are you seeing any, you know, any impact on volumes of crude oil coming out of the Midwest as a result of that pipeline outage?
Joe Pyne (Chairman and CEO)
Yeah, we don't think so, but, I mean, truthfully, John, I'm not sure we'd know. The crude oil coming out of the Midwest that we handle is pretty consistent. No real change to the flow there. And we're not hearing anything within the business, but, you know, yeah, I'm not sure we know.
John Barnes (Managing Director and Senior Research Analyst)
Okay, all right. And then, my second question is, is kind of two-part, one near term, one longer term, and, and that is, in 2014, are you aware of any, any maintenance work to be done on the rivers that would have, you know, similar kind of implications as you experienced last year with the, you know, with the lock outage at Algiers and that kind of thing? And then, the longer term, you know, portion of that question is, you know, I guess with the, the transportation bill, you know, being proposed right now and that kind of thing, do you believe that there's going to be better funding for some of these projects, and we should see more of these projects that, that maybe improve the efficiency of the river system over the next several years?
Joe Pyne (Chairman and CEO)
Yeah, I think if the, you know, assuming water gets through, and, and, you know, every indication is that that it will, it may be later this year before it's passed. There's some concern about getting through some of the primaries before it gets back to Congress for a vote. But it went out of the house at almost unanimous, so I think it's gonna get through. That, that's certainly gonna help. But I think more important than the, you know, the marginal efficiency improvements is that we're committed to making the investments in the infrastructure that is gonna make it more reliable. You referred to Algiers Lock. Well, Algiers Lock was a unplanned outage, and some of the other problems last year were unplanned outages.
You know, with respect to looking at 2014, I don't think there's anything that's unusual that's occurring from a planned perspective. I think that that most you know... Every year, you're doing something, so it it I don't think there's anything that is atypical to the maintenance cycle that you know hasn't been kind of there for the last several years.
John Barnes (Managing Director and Senior Research Analyst)
Okay. All right, thanks for your time, and congrats on your new role.
Joe Pyne (Chairman and CEO)
Yeah, thank you. Thank you, John.
Operator (participant)
Our next question comes from John Larkin from Stifel. Please go ahead.
John Larkin (Managing Director of Investment Banking, Transportation, and Logistics)
Yes, thank you, gentlemen, for taking my questions this morning. Had a question around the notion of utilization. You've mentioned that the utilization of the inland barge fleet has stayed constant at about 90%-95% later on, mentioning that that was very close to full utilization. And then, the coastal utilization has stayed at about 90%. And then there was a comment in your prepared remarks suggesting that perhaps that can be pushed up. What is the maximum utilization rate that is sort of operationally possible, I guess, given the real world. And is there anything different between the inland operation and the coastal operation that makes those maximum levels different?
Joe Pyne (Chairman and CEO)
Yeah, no, I think 95 is probably essentially max capacity. It's hard to get over 95 without doing some crazy things. So, we're essentially at full capacity on the inland side. Coast-wise, you get some movement regionally. You know, Alaska has some seasonality, so you do have some equipment that doesn't get used year-round. You know, likewise, you can have some other things that, for example, New York Harbor, when it's very cold, we can be very busy in New York Harbor. So there's some seasonality that factors into your overall utilization, more so on the coast-wise business than the inland business. Inland, like I said, is full capacity, running 90%-95%.
Coast-wise is in the 90s, but, you know, we have periods where we're up close to that 95% range. I don't know if that answered your question, John?
John Larkin (Managing Director of Investment Banking, Transportation, and Logistics)
Yeah, I think it does. It sounds like you're awfully close. I was really trying to think about sort of the incremental margins that might be available if you could push coastal up from, say, 90 to 95. I would guess those incremental margins are rather attractive.
Joe Pyne (Chairman and CEO)
They're very attractive.
John Larkin (Managing Director of Investment Banking, Transportation, and Logistics)
Kind of pushing up against the reasonable utilization levels already.
Joe Pyne (Chairman and CEO)
Yeah, I think that's, that's right. There's some room left, though. There's some room left, to be sure.
John Larkin (Managing Director of Investment Banking, Transportation, and Logistics)
Okay. And then, you know, as the market has improved, how have the shipyards behaved in terms of pricing, tank barge construction? Have you seen those prices rise, or are you a big enough player, sort of through thick and thin, that you're able to sort of mitigate some of that pricing pressure?
Joe Pyne (Chairman and CEO)
Yeah, it's always a tug of war, John. And I think that we do have a lot of leverage because we have more units than anybody else in the country, and we try to use that leverage. I would say that the shipyard pricing is, you know, modestly up.
John Larkin (Managing Director of Investment Banking, Transportation, and Logistics)
Okay. I take that to mean, say, single digits?
Joe Pyne (Chairman and CEO)
Oh, yeah, yeah. Yeah, low single digits.
John Larkin (Managing Director of Investment Banking, Transportation, and Logistics)
Got it. Thank you very much.
Joe Pyne (Chairman and CEO)
Sure.
Operator (participant)
Our next question comes from John Mims from FBR Capital Markets.
Chris Carey (Equity Analyst)
Hey, guys, this is Chris Carey on for John. You know, just kind of broadly speaking, I'm not sure who wants to take a stab at this one, but, you know, there's been obviously a lot of talk in the market about netbacks, you know, for crude oil versus in pipes versus rails. I was kind of wondering, you know, where barge fits into the pricing standpoint there. You know, if it's, say, $10, a little bit more to take a barrel per barrel to move from, you know, Bakken to the Gulf, I wonder, you know, how much that price changes if you were to switch, you know, to barge in, say, you know, Chicago or St. Louis, than going down to the Gulf? Just trying to get an idea for the differentiation of the, of the value proposition there.
Joe Pyne (Chairman and CEO)
Yeah. No, that's a good question. Look, look at it this way. The customer, and some of these guys are very sophisticated, are working hard on an every day basis to get the cheapest, reliable feedstock to the refinery. And that's very dynamic because you can have, you know, differentials in different crudes, you know, West Texas, Louisiana, and Brent, Saudi, you know, they're gonna be priced at given times differently. You have transportation options that change, that get disrupted. So it's a very dynamic process.
And over the long run, you're gonna have a system that delivers the objective of, you know, kind of that low-cost feedstock that is reliable. It's got to be reliable, because if you don't have it, you shut the facility down.
Chris Carey (Equity Analyst)
Right.
Joe Pyne (Chairman and CEO)
When you're looking at, you know, barge versus rail, you know, it. You're gonna have to look at it in the context of, you know, pricing, reliability, you know, pricing of the product, reliability of that source. Just, it's gonna move around a lot. It's gonna be a very dynamic process.
Chris Carey (Equity Analyst)
Right. And, you know, just to that point, you know, my sense is that there's been more talk around crude by rail, perhaps a bit of regulation coming in, you know, to be determined, of course. But I wonder if you guys are getting any more interest from producers looking to maybe shift their shipping methods in order to kind of, you know, hedge that maybe a little bit of that regulatory risk. And I don't know if you are seeing that, but any color would be, you know, really helpful.
Joe Pyne (Chairman and CEO)
... Well, most of the supply is not on the river, so it either has to go by pipeline or rail or truck to get there. So look at rail as a way of delivering product to, you know, to the river, where it can then be loaded on barges. The reason that rail is popular and that pipelines have not, you know, taken that volume, is that rail is not demanding long-term agreements. It's flexible with respect to moving crude oil from different sources.
But in the total kind of feedstock cost dynamics, it's gonna be a combination of rail, pipeline, and marine vessels that meet, you know, particular shippers requirements. And it's gonna move around, and it's gonna move around based on a number of factors. But as you look at kind of our business, we think that we're gonna continue to be a, you know, a significant transportation mode, moving it. And, you know, at least for what we see today, it's gonna continue to grow. The demand is gonna continue to grow as more crude oil, more gas condensate comes online.
Chris Carey (Equity Analyst)
Right. No, thanks for that. That's, that's really helpful. You know, I guess as my, you know, follow-up question, and, you know, it's right along that same point. You know, I was just wondering if you guys had any color on pricing differentials between railing crude to, you know, California refineries. Obviously, again, a lot of regulatory hurdles there, versus, you know, railing crude to the, you know, Pacific Northwest and then barging it down in coastal barges, you know, whether it's via Vancouver, Washington, or any other, you know, port. I'm wondering how you guys are kind of thinking about that opportunity on the West Coast.
Joe Pyne (Chairman and CEO)
We think that the marine component is gonna be an important logistical part of supplying crude to those refineries. Now, some of it's gonna be railed in, but a lot of it's gonna be moved by water. And you know, the differentials, I'm not sure anybody really knows what they are yet, but there's a lot of challenges for you know, kind of getting a lot of crude oil delivered by rail into California.
Chris Carey (Equity Analyst)
Right.
Joe Pyne (Chairman and CEO)
It's gonna happen, but there's a lot of moving parts in that.
David Grzebinski (President, COO, and CFO)
Yeah. Hey, Chris, this is David. Yeah, you might call Steve Holcomb afterwards. There's a newsletter out there that talks about some of these rates that they estimate, and he can share that with you.
Chris Carey (Equity Analyst)
Okay. Yeah. Thanks, David. That's really helpful. Okay, well, that's it. I really appreciate your guys' time.
Joe Pyne (Chairman and CEO)
Operator, we'll take, we'll take one more call, please.
Operator (participant)
Sure. Last question comes from Matt Young from Morningstar. Please go ahead.
Matt Young (Senior Equity Analyst)
Good morning, guys. Thanks for fitting me in. Most of my questions have been answered, but I just wanted to follow up on the previous question. In the coastal business, in terms of the shale oil movements that you talked about, what would you say that most of the longer term growth is likely to come from on a regional basis? Would you think that would be on the West Coast, perhaps in the Columbia River area and so forth, or on the East, or maybe even cross-Gulf?
David Grzebinski (President, COO, and CFO)
Yeah, I think it's all of the above. We're seeing it pretty much everywhere. You know, with cross-Gulf, we're moving a lot cross-Gulf from Corpus Christi to Houston, Port Arthur, New Orleans area. You know, West Coast, they're still trying to get the unit trains out to the West Coast and get that permitted, but that's starting to pick up, and it looks like it's gonna grow fairly healthily. And then, of course, there's a lot of unit trains going into Albany. You know, from Albany, we'll be taking crude and condensate down the Hudson to the refineries on the East Coast. So,